What You Think About Investing Is Wrong

Updated: Jan 20

Here is review and some additional thoughts on a recent blog post from Michael Batnick titled, Opposite of Conventional Wisdom. The post talks about a few different components of investing that investors get wrong - I wanted to add some commentary about it.


1. Stocks are riskier than bonds


Batnick comments, " One-month U.S. Treasury bills, often put in the risk-free bucket, went 68 years with a negative real return. Sure stocks can kill you fast, but bonds can kill you slowly. "


Investors generally believe that stocks are super risky. The media often uses the words "risk" and "volatility" interchangeably when they should not be doing so. Depending on one's time horizon, it could be argued that stocks are in fact not risky whatsoever. In fact, an investor that has a 15 year time horizon has never lost money in the stock market if they bought and held. I did a blog post supporting this back in January titled, "The Return Numbers You Should Be Caring About." The takeaway here is to make sure you understand WHAT risk tolerance you should be taking to meet your goals and WHY it's the correct risk tolerance.


2. Gold is a good hedge against inflation


I recently had someone tell me that if (when) the stock market goes down, they'll be pissed that I didn't tell them to buy gold. Even if they were half-joking, they definitely weren't a good fit for my firm (not to mention way out in left field with their thinking). Batnick briefly touches on how gold and inflation do not have a strong correlation. I'll go a step further and mention what legendary investor, Warren Buffett, thought about gold when he talked about it at the Berkshire 2018 annual meeting. He compared $10,000 invested in stocks and gold in 1942 (the first year he invested in stocks). That money invested in an S&P 500 index fund (there were none at the time, he noted) would've been worth $51 million in 2018 while a gold investment would've been worth only $400,000.


3. Stocks crash from all-time highs


Batnick writes, "Since 1927, there have been 202 monthly closing highs in the S&P 500. There have been 4 market crashes. That’s a lot of time spent worrying about something that happens 2% of the time. All-time highs are generally more of a green light than a red one."


I recently took on a client whose previous advisor told them that they need to change/trade their commission-based mutual funds because "the market is at an all-time high." There wasn't a plan. There wasn't a risk profile. There was nothing. What the client wanted was the "why" behind the advisor's recommendation. Since it was June, my guess was that the real "why" behind the recommendation was to hit an end of quarter commission bonus.


All-time highs happen often. As long as you have a cash buffer and a down market plan, you can use corrections and crashes as an opportunity rather than a risk.


4. Your house is a good investment


For this topic, Batnick uses data from Yale professor Robert Shiller. He states, "real home prices went nowhere for 100 years. I am not suggesting home ownership is bad in any way, but there is this idea that you buy a house, sell it after thirty years, take your gains and retire to a beach. The truth is closer to what my friend Morgan Housel once said: 'A house is a large liability masquerading as a safe asset.'"


There are a lot of things to consider when purchasing a home. However, one thing is true: if you're planning to use a primary home as a retirement asset, you better think twice about it. There are definitely ways to make money in real estate, but generally using your primary home as an investment isn't one of them.

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